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Trickle-down Economics: Can Jokowi Escape the Lure of This Failed Theory?

Joe Biden has dismissed the “trickle-down effect” as a failed economic strategy. So now he is building the economy from the bottom and the middle instead of from the top. Indonesia has a chance to do the same but can the country’s decision makers escape from the hold of this persistent economic theory?

By Ranessa Nainggolan

In his first speech to Congress, which took place at the end of April 2021, President Biden of the United States said the trickle-down effect had never worked. For saying that, Biden received a standing ovation, with members of the Democratic Party applauding the loudest. Biden believes that the economy must be built from the bottom and middle. 

The trickle-down effect is an economic concept that has figured prominently in the economic development of the United States. This concept is realized in tax incentives for wealthy businessmen. As they enjoy such favors, companies are expected to drive the economy by providing jobs to the American people. 

This concept was popularized by the US’s 40th president, Ronald Reagan, and is shared by the Republican Party. However, many Republican Party members support Biden’s economic program, namely removing tax incentives and increasing the minimum wage. Biden believes the richest 01 percent in the United States can contribute more to government programs, especially in education, health, and infrastructure.

Biden’s position is in line with a study from the London School of Economics conducted in 2020. Based on this study, the tax incentive policy strengthens economic disparities in America and has minimal contribution to economic growth and unemployment. From the Ipsos survey, 51 percent of Americans believe trickle-down economics is ineffective.  

Here in Indonesia, maybe President Joko Widodo (Jokowi) could follow Biden’s lead and change his approach to economic policy. That would be a major change, since the concept of trickle-down economics itself is still heavily implemented in Indonesia, especially in the Jokowi administration. 

Bagong Suyanto, Professor of Sociology of Economics at the University of Airlangga (Unair), Surabaya, said that Jokowi should imitate Biden by moving the economy from below. Bagong said that top-down economic policies hinder economic equality. The government should have started a populist economy by boosting small industry

Bagong’s statement is in line with the opinion of Rizal Edhy Halim, an Economics Expert from the University of Indonesia (UI). Rizal said the trickle-down effect (also called trickle-down economics) is a concept that failed and was a factor in the widening economic gap.

So, how is the actual implementation of trickle-down economics in Indonesia? Is the concept also ineffective here as in the United States?  

Trickle-down effect and the Omnibus Law

The concept of the trickle-down effect is an economic theory introduced by the economist Albert Hirschman. Hirschman believes that economic policy should focus more on entrepreneurs or owners of capital so that economic benefits will later “trickle” down to the lower layers of society. The trickle-down effect policy is usually in the form of tax incentives, loosening regulations for companies, and so on. 

The concept of the trickle-down effect is also in line with spillover effects, namely the occurrence of a phenomenon or event that can have a positive or negative effect on the economy, social system and politics. For example, when entrepreneurs flourish that can have positive implications for economic growth and provide benefits to the lower classes of society by creating jobs. 

In Indonesia, the trickle-down effect has been a strategy for economic development since the Soeharto era. In the Soeharto administration economic, social, and political development was centered on Java, especially Jakarta. The expectation was that prosperity in Jakarta would “trickle-down” to other areas.  

Sugeng Syahrie’s article entitled, “The Politics of New Order Development: Industrialization, Privatization, and Economic Growth,” explains how the trickle-down effect was used by Soeharto. During the New Order era, Indonesia’s development was very much oriented towards economic growth. To realize this, the government implemented policies through industrialization (non-agricultural) and road building in urban areas.  

The Indonesian government’s policy until today is inseparable from the ideas developed by the World Bank and the International Monetary Fund (IMF), which have a neoclassical economic orientation. They believe that the best way to help developing countries is to promote urban industrialization with the injection of capital from Western countries. This strategy is expected to encourage growth in other sectors and increase income in those sectors. 

However, this neoclassical strategy did not make an optimal contribution to development financing, so it was considered a failure. As a result, Soeharto reoriented in the late 1980s and commercialized strategic spaces and locations around the metropolitan city.

Although it did not provide optimal results during the New Order era, Jokowi’s economic policies still adopted the trickle-down effect concept, such as the Omnibus Law. Herlambang Wiratraman’s article entitled Omnibus Law and Human Rights states that the Omnibus Law is an investment-friendly policy. 

The Omnibus Law resolves overlapping regulations and is the key to Indonesia’s economic growth by providing business leeway for entrepreneurs and cutting bureaucracy. The Omnibus Law is expected to create a good investment climate. The government has also repeatedly stated that the Omnibus Law will absorb a large number of workers.

Herlambang argued that government policies that prioritize investment interests would be detrimental to the issue of citizens’ rights. In the Omnibus Law, regarding human rights, there is only minimal discussion on the promotion and protection of human rights.

The World Bank report entitled The Long Road to Recovery says that the Omnibus Law can indeed open up greater opportunities for Indonesia to do business, but the legal product is also detrimental to workers and the environment. 

According to the World Bank, the Omnibus Law weakens labor protection, which can lead to income inequality. From an environmental perspective, the Omnibus Law has the potential to damage the environment and damage natural assets that are important to the livelihoods of many people, which can ultimately and in the long run harm investment.  

The Influence of American Education

The trickle-down effect can provide benefits to economic growth, but the government often neglects its significant negative impactIn the face of that problemeconomic policies oriented more directly to the people’s welfare instead of top-down economic policies. 

Mohammad Hatta introduced the populist economy. This concept is the antithesis of the trickle-down effect, which is a political-economic concept that focuses its development on the people. 

However, the current economic policy is still dominated by the trickle-down effect conceptnot a populist economy that adopts a bottom-up orientation. This was admitted by Vice President Ma’ruf Amin when he published the book The Ma’ruf Amin Way. Ma’ruf said that the trickle-down effect created economic inequality in Indonesia, so he encouraged the implementation of a populist economy. 

This raises the question, is it possible that in the future Indonesia will abandon the trickle-down effect and switch to a populist economy, just like Biden did in the United States?

The trickle-down effect adopted by the government since the New Order was inseparable from the decision-makers who were American educated. Sri Mulyani and Bambang Brodjonegoro who served at the Ministry of Finance during the Jokowi administration were graduates of the Urbana Champaign University of Illinois in Illinois, USA. 

The majority of Indonesia’s Finance Ministers are US graduates. Since the Reformasi, only two Finance Ministers were not graduates of an American educational institution. 

The Indonesian Minister of Finance’s adoption of the trickle-down effect concept has a close relationship with the direction of their alma mater’s thoughts. The trickle-down effect originates from popular neoclassical thinking in America. Neoclassical thinking itself still dominates studies at various universities in the United States. 

The writings of Zach Ward-Perkins and Joe Earle, entitled Economics students need to be taught more than neoclassical theory, criticize the syllabus of American universities. Perkins and Earle said that economic education in the US is dominated by the neoclassical concept, when this concept itself is considered to be outmoded. 

This of course also affects the policy of the United States, which adopts neoclassicism. These writers urged that economic education in the US be more open to other economic theories and not to dwell exclusively on neoclassical concepts. 

Zach’s writing explains that the trickle-down effect concept adopted by the Indonesian Minister of Finance is the result of the influence of their alma mater in America with a neoclassical economic perspective. Of course, this concept becomes difficult to remove from the way of thinking of economic policymakers in Indonesia.

Rejection of the trickle-down effect in Indonesia therefore seems to be a remote possibility that the majority of the country’s economic decision makers were graduates of American educational institutions. It is not likely that Jokowi will be following Biden’s example in trying to build from the bottom and the middle. 

Editor’s note: The views expressed in this article are the author’s and do not necessarily reflect the views of PinterPolitik.

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